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An Accounting Song

An Accounting Song

[Christmas Season]  I’ve been listening to Christmas music for a few days, but haven’t heard this one.  You know the tune.  Check back every so often for a new stanza.

On the twelth day of Christmas my true love gave to me,

Twelve happy accountants,
Eleven audit errors,
Ten digit keypads,
Nine green eye shades,
Eight accounting standards,
Seven tacky tick marks,
Six degrees / convergence,
Five pencil stubs,
Four accounting giants,
Three cups of coffee,
Two much expense,
And a debit where a credit ought to be.

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February 2 is Groundhog Day observed in North America.  As lived in folk culture, if a groundhog checks outside conditions this morning and sees its shadow, then six more weeks of winter are sure to follow.  If the sky is overcast and the groundhog can’t see its shadow, then spring is about to arrive.  A large Groundhog Day celebration is held in Punxsutawney, Pennsylvania.

Groundhog Day received a boost in popularity with the publication of the charming 1993 Harold Ramis film, Groundhog Day.  Bill Murray plays an exceedingly self-centered Phil Connors who must relive February 2 over and over again until learning to serve others instead of self.  I love the film, and consider it one of the finest ever made.

In the world of regulatory accounting, we can reflect on what a Groundhog Day forecast will predict, a longer time of winter or a new time of spring.  It seems as if we have been reliving (metaphorically, of course) a broken world of accounting.  Accounting is misapplied by corporate executives over and over again, leading to prolonged winters of scandal.  Large audit firms prolong this winter because they selfishly serve their own business interests instead of the public.

Of course we all know the forecast:  a longer time of winter.  There is nary a hint of changed conditions that would lead to selfless reporting of corporate financial results. We seem doomed to relive past cycles of accounting scandal.  Where is the accounting world’s Phil Connors?  Stuck in a time warp.  Just as are we.

Debit and credit  – – David Albrecht


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Recent DNA results raise doubt that Pacioli fathers accounting.

November 10 is when we celebrate Accountant’s Day.  I recently wrote,

On November 10, 1494, volume 2 of Summa de Arithmetica, Geometria, Proportioni et Proportionalita (Everything About Arithmetic, Geometry and Proportion) was published.  It is in volume 2 of the Summa that Luca Pacioli included a description of the bookkeeping/accounting system of Venice.   In honor of this contribution, Pacioli has carried for centuries the title of Father of Accounting.

Pacioli, though, never claimed to invent anything related to accounting.  In an attempt to refute paternity, Pacioli consented to a DNA test.

New Mexico State University accounting professor (and master accounting humorist) Ed Scribner writes, “Recent DNA evidence reveals that Pacioli is not actually the Father of Accounting …”

Accounting researcher Dan Stone from the University of Kentucky agrees, “Recent DNA evidence indicates that while Pacioli is not actually the Father of Accounting, he is the Father of the hoodie.”

Pacioli does not claim that, either.

I wonder.  Why would a celibate monk be considered the father of anything?

Debit and credit – – David Albrecht

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J. Edward Ketz is my round tuit.  ???  A round tuit is anything that unlocks your sense of inertia, allowing you to start working on some task that has been delayed far too long.

An example helps.  Have you, like me, ever been nailed for procrastinating?  All the time.  It probably followed this thought, “I’ll get a round tuit when there’s a free moment.”  But everything else doesn’t get done and there’s no free time, so you never get a round to it.

Ed is my round tuit.

On February 25, 2010, the Securities and Exchange Commission (SEC) released a formal Commission Statement in Support of Convergence and Global Accounting Standards.

I never got around to reacting.  Yesterday (March 29, 2010), Ed Ketz published his reaction, “The Iffiness of IFRS“.  It’s better than anything I can  write (anything Ed writes is always better than anything I can ever write, just take it for truth).  Better late than ever, here are my personal reactions.

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Occasionally, I’ve been sending e-mails over to AECM about rising European discontent with respect to IFRS.  I’ve been regularly poo-pooed as a result.  After all, I’m an anti-IFRS guy and am thought to be creating rumors of imaginary IFRS difficulties in an attempt to delay American adoption of IFRS.  But I simply read a lot (especially European publications Accountancy Age and Financial Times).  There have several stories quoting EU and member-state politician concerns over the IASB’s IFRS.

WSJWell, the bad news has jumped the pond, to be reported in the venerable Wall Street Journal.  I refer specifically to three stories by Simon Nixon in the Heard on the Street column:

Similar stories appear in European newspapers.  If accurately reporting reality, it all leads one to conclude that there is a reasonable possibility that the EU will back away from IFRS to either (1) modified IFRS, or (2) unique European GAAP.  If either were to happen, wouldn’t it have an impact on IFRS consideration in the U.S.? I would hope so.

In Paris Mounts the Barricades, Nixon concludes, “French minister Christine Lagarde plans to lobby other G-20 finance ministers meeting in Scotland on Friday (Nov. 6?) to accept greater political control of the standard-setting process.”  Later in the article, Nixon says:

Paris’s real objection is to the IASB itself, which it believes is too focused on investor interests and not sufficiently accountable to politicians. Never mind that the G-20 in Pittsburgh specifically endorsed the independence of standard-setters. Never mind the G-20 also endorsed efforts by the IASB to improve its accountability by establishing a monitoring board and consulting more widely with stakeholders such as regulators. Ms. Lagarde’s objective is a greater role for national governments.

Consistent with Shyam Sunder’s brilliant analysis, such an objective is rational, natural and to be expected.

Nixon concludes with, “Instead of tighter convergence on accounting, that would lead to fragmentation, which is in nobody’s interest.”  Mr. Nixon, you are wrong. It  is in France’s national interest to manage its own economy and be responsive to its own citizens.  You see, having accounting standards that promote national interests is important to every country in the world.

In New Proposals … Meet Resistance, Nixon describes new a new IASB standard on financial instrument valuation as an improvement, but only partly effective.  He says,

But before further progress can be made, the IASB must overcome a bigger obstacle:  French resistance to the current watered-down standard. …  Demands for political control of standard-setting appear to be gathering support in Europe.

He concludes with:

“This is worrying.  Standard-setting must be independent if it is to command investor confidence.  Global convergence is too important a goal to let slip.”

Mr. Simon, I wish you knew something about accounting and international finance.  It has been shown, time and time again, that global convergence of accounting standards leads to a grossly sub-optimal economic result.  You see, capital markets are mostly local or national.  Let’s say that an American company with $100 million in sales were to float its IPO.  Its costs to raise capital are much less if it only markets its securities to American investors.  Marketing its stock to European investors would incur prohibitively huge transaction costs and be exposed to currency fluctuation losses.  Moreover, international investors would largely be reluctant to participate in the offering, fearing that any potential investment returns would be wiped out by foreign currency fluctuations.

Finally, in EU’s Go-Alone Approach, you report (or more accurately, your analysis leads you to conclude):

The decision to appoint a low-key Belgian as president, the European Union’s newly created top job, and an obscure unelected British official as foreign-policy chief is a blow for the 27-member bloc’s global ambitions. … France and Germany now look free to decide Europe’s two top economic jobs, which become vacant in January.  The European commissioners for competition and the single market have real power to shape Europe’s economic destiny.  …

If French and German nominees end up holding these economic posts, investors should brace for a shift in EU policy. Important dossiers await the new commissioners, including financial-system overhaul, sensitive state-aid decisions on banks and auto makers, and a revamp of bank-accounting rules. France, for example, wants greater political control of accounting standards, threatening to undermine the Group of 20 industrial and developing nations’ goal of convergence.

European developments should have us all jumping for joy.

Many European observers agree with you.  This gives me reason to jump for joy, and it should for you too.

All of this isn’t too surprising.  Why?  Ten months ago the European Union offered to completely fund all future IASB operations.  As discussed in E.U. Bids to Buy IASB, this was attempted because the E.U. (and your respected Charlie McGreevy) desired to own the IASB, lock stock and barrel.  After being rebuffed, it isn’t surprising for me to hear that the E.U. wants to go it alone.  I’ve been predicting it.

Mr. Nixon, your stories are too biased, promoting one side of a very controversial issue.  Unless placed on the editorial page, readers expect stories to have more meat and less opinion.  Please tone it down.

Debit and credit –  – David Albrecht

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A letter from three former SEC chairmen, printed in today’s Wall Street Journal, is today’s big news.   I am referring to:   “Don’t Let Banks Hide Bad Assets:   In times of distress, there’s always pressure to change accounting standards,” by Roderick M. Hills, Harvey L. Pitt, and David S. Ruder,”  The Wall Street Journal, November 19, 2009.

Independent accounting standards have helped make American capital markets the best in the world. In making financial decisions, investors rely heavily upon the integrity of corporate financial reports prepared in accordance with accounting standards established by the independent Financial Accounting Standards Board (FASB). That board is supervised by the Securities and Exchange Commission (SEC).

Now, the Obama administration is on the verge of transferring accounting standards responsibility from the SEC to a systemic risk regulator. Such a radical move would have extremely negative consequences for our capital markets.

Although there may be good reasons for establishing different regulatory capital standards for financial services firms, those reasons cannot justify dispensing with the FASB’s accounting standards. Acting in accord with powers given to it by the Sarbanes-Oxley Act, the SEC has formally recognized the FASB as the definitive standard-setting body, capable of “improving the accuracy and effectiveness of financial reporting and the protection of investors.”

The SEC treats accounting standards adopted by the board as authoritative. If the SEC has concerns about, or disagrees with, accounting standards promulgated by the FASB, it can refuse to give them deference.

As I blogged yesterday, it is a fact of life that accounting standards frequently have economic consequences.  It is government’s responsibility to adjudicate between competing economic interests.

Banks are currently trying to use the political arena and the Congressional branch of government to influence accounting rules.  Specifically, I am referring to an amendment sponsored by Representative Ed Perlmutter (D-CO) to the Financial Stability Improvement Act, currently being considered by the House Financial Services Committee.

Although I do not favor the bank position on fair value accounting, I applaud their attempt to use Congress to influence accounting standards.

Why?  The SEC has two relevant policies. First, any country adopting IFRS should use them lock-stock-and barrel. Second, it endorses the notion of one universal set of global accounting standards, and is poised to announce the adoption of IFRS for U.S. reporting.

It seems to me that the SEC is about to abdicate its responsibility and role, in oversight of accounting standards. If the SEC continues along its intended path, there will be no U.S. governmental control over accounting standards. Oh, there is the hope that the SEC can influence the IASB. Europe has that same hope. Last week we saw that several countries in Europe have concerns over the lack of European control over the IASB, and continued use of IFRS in Europe is a little doubtful.

Well, if the SEC is anxious to get out of the business of overseeing accounting standards (and adjudicating competing economic interests), then it seems reasonable to me that it is in the self-interest of concerned economic interests in the U.S. to preserve a governmental solution to oversight of accounting standards. As I blogged yesterday, any nation that cedes control over some aspect of its economy to an extra-national body is incredibly stupid. Today I add that it is brainless, dazed, deficient, dense, dim, doltish, dopey, dull, dumb, foolish, futile, gullible, half-baked, half-witted, idiotic, ill-advised, imbecilic, inane, indiscreet, insensate, irrelevant, laughable, ludicrous, meaningless, mindless, moronic, naive, nonsensical, obtuse, out to lunch, pointless, puerile, rash, senseless, shortsighted, simple, simpleminded, slow, sluggish, stolid, stupefied, thick, thick-headed, trivial, unintelligent, unthinking, and witless (synonyms supplied by thesaurus.com).

Consequently, I do not think it a bad thing the banks are appealing to Congress.

Now we have three previous Chairmen of the SEC speak out on the issue.   Their position is that the SEC role in determining accounting standards should not be overridden. They cite the pre-eminence of U.S. capital markets and attribute it in part to American accounting standards.   At first glance, this seems like a defense of continuing the status quo of FASB-SEC working partnership. I mean, if it isn’t broken, why fix it?

But that isn’t what they mean. There is no more vocal proponent of IFRS than Harvey Pitt, now writing for Compliance Week. Ruder has been interested in the U.S. adopting IFRS for decades.

What these three previous chairmen of the SEC mean is that the Perlmutter proposal upsets the applecart of the inexorable march toward IFRS in the United States.  The SEC has no intention of letting anything get in the way of that.

Why can’t these guys say what they mean?  Oh, they’re politicians.

It could very well be that the Perlmutter proposal is the last opportunity to derail IFRS adoption in the U.S.  Defeat of his proposal would clear the way for an SEC announcement that the U.S. has adopted IFRS.

To be continued.

Debit and credit – – David Albrecht

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[Postscript:  a well placed observer has questioned the wisdom of my claiming that certain SEC commissioners are ignorant.  Upon glancing through transcripts of the commissioners’ remarks (released after the publication of this essay), I can understand now how “ignorant” was a poor choice of wording, and I apologize to the Commissioners for that word usage.  At the time I wrote the essay, I was grasping for some reason why certain commissioners continue to spout sophistry (false reasoning).   I chalked it up to ignorance.  I now realize that I might never know the reason for the sophistry, as the SEC principals refuse to discuss the assumptions and conceptual foundations of their sophistry.   Never-the-less, sophistry it is, and that’s what I was reacting to.  Were I to write the article today, I would title it either:  SEC Sophistry To Lead to Folly, or, SEC Errant Views To Lead to Folly.  Profalbrecht, 11/27/09]


Yesterday, a third Commissioner of the Securities and Exchange Commission spoke out, (1) decrying the politicization of the accounting standard setting process, and (2) advocating the need for a single set of global accounting standards.  By so speaking she aired her ignorance for all to see. [Sentence removed 11/27/09]

 

As reported in a Reuters update, “SEC’s Casey: Accounting Convergence Must Continue,” Kathleen Casey “warned against the over politicization of accounting rules, or attempts to pressure accounting rule makers to write rules that would favor a specific goal sought by a particular industry.”  Earlier this week, another SEC Commissioner, Elisse Walter, said the same thing.  SEC chair Mary Schapiro has been saying it since her confirmation hearings   Not to be left in the cold, FASB Chair Robert Herz chimed in with a similar sentiment.  Of course, they all chant the mantra of global accounting standards.

They are wrong.  I hope everyone in the world knows it. [Sentence deleted 11/27/09]

Here’s why they are wrong.

There is no such thing as universal accounting truth. Accounting rules spring from the reason of human beings.  The rules and principles that guide today’s capital markets are recent inventions.  The most cherished accounting axiom–assets equal liabilities plus owners equity–has been around less than six hundred years.  Before that there was simply no need for it, therefore it wasn’t yet invented.  Here’s a news flash:  that accounting axiom is obsolete and no longer works in today’s world (we’ve piled so much on it, it no longer balances).

Accounting rules that govern the formation of corporate financial statements all have economic consequences.  It has always been this way.  Every rule puts some interest group at an advantage over another.  From the start, investors have clamored for more disclosure than the executives running corporations have wanted to supply.  This tension is natural.  There is no right or wrong in an absolute accounting sense, God has no such commandment.

It is any (or every) government’s domain is to adjudicate between competing economic interests.  That is what government does.  For example, governments are good at levying and collecting taxes.  This has been going on since the beginning of human history.  And what is tax but one group being forced to transfer it’s money to another group.

How does a government decide between competing interests?  By politics.

It is foolish for anyone to abdicate his/her right to seek a political solution to any political, economic, social or military issue.   Why would anyone want to do that?  It is tantamount to denying the person’s free will, “No, I’m too stupid to decide for myself, you do it for me.  Really, I insist.”

We have not always realized the political nature of standard setting in the U.S.  However, since the formation of the FASB every potential accounting standard has had to go through a political process:  discussion memorandum, then exposure draft.  And the SEC always  has the ability to override (which it has upon occasion).

Why then, are these people decrying the current politicization of accounting standards? It is because they don’t want to get trumped by someone else’s politics.

They are using a time-tested tactic:  state a fallacy long enough and long enough and pretty soon it is accepted as verdad!

Please realize that no SEC commissioner has taken advanced education in accounting.  Nor has the chief accountant.  Nor has the current chair of the FASB. [Sentence removed 11/27] I put forth the notion that possibly, just possibly, they have missed out on something that the rest of us have known for a long time.  It is the way of human beings that accounting standard setting is a political process.

If you can buy into that, then here’s the rest of the truth.  Political factors, and the governmental processes that adjudicate between them, are not the same all over the world.  They are different in parts of Europe and Asia than they are in the U.S.  As a result, the League of Nations could not function as envisioned, neither could the United Nations.

Similar political processes affect accounting standard setting.  Surprise!  How reasonable is it to think that global accounting standard setters are going to be responsive to economic interests in your part of the world?  France is already discovering that the IASB’s IFRS are not responsive to certain French economic interests.  So France is balking.  As it should.  Ceding control of French economic interests over to the IASB was a stupid thing to do.  It was incredibly stupid.  And so it will be if the U.S. does likewise.

Unfortunately, the SEC commissioners are ignorant of all things accounting.  It’s ignorance is leading it to adopt IFRS.  And that, my friends, is pure folly. do not understand that they are sophist in the ways of accounting,   Sophistry acted on is folly. [remarks edited 11/27/09]  A folly that will cost of us trillions.

The SEC's sophistry is a crying shame! (edited)

As has been chronicled in this blog, the smartest and wisest accounting professors (the nerds who study accounting for a living) have carefully explained why there should be no single set of global accounting standards.  The SEC, though, is ignorant. That, or its commissioners are not educated enough to understand.sophist [edited 11/27/09].  Sob, that’s a crying shame.

Debit and credit – – David Albrecht

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